US – China trade developments and central bank (ECB, Fed, BoJ, BoE) meetings are expected to shape market trends in September
The US-China trade war deteriorated further in August (September), with both sides announcing additional tariffs. The US will impose tariffs of 15% on $300bn in Chinese imports in two phases: the first came into effect on September 1st on circa $130bn of Chinese imports and a further 15% will be implemented on the remaining imports in mid-December; these include toys and sports equipment, as well as footwear and electronic devices. Moreover, the US is set to increase the tariff applied to $250bn of Chinese imports, from 25% to 30% from October 1st. The overall USD notional value of tariffs will be $120bn or 0.6% of US GDP if all tariffs are implemented as scheduled.
China retaliated by increasing tariffs by 5% - 10% on $75bn worth of US imports also in two phases (September/December) and 5% on US crude oil imports. Moreover, a previously suspended 25% tariff on US autos and auto parts imports will be reinstated. While talks between US and Chinese officials are still planned for September, we do not believe an agreement will be reached quickly.
In addition to the above trade developments, the US labelled China as a currency manipulator on August 5th with the Chinese Yuan depreciating to an 11-year low against the US dollar. Furthermore, there is growing speculation that FX intervention (targeting a weaker USD) may be used from the US Treasury Exchange Stabilization Fund which holds an estimated $190bn (combined with the Fed). Moreover, President Trump threatened to invoke the US International Emergency Economic Powers Act (IEEPA) to curtail US companies’ transactions with Chinese entities. Finally, President Trump continues to attack Fed Chair, Jerome Powell (“who is our bigger enemy, Jay Powell or Chairman Xi?”). Overall, trade developments could provoke a significant global economic slowdown through raising market uncertainty considerably.
Global equity markets demonstrated elevated volatility conditioned on trade developments and rhetoric, with the MSCI ACWI down by 2.6% in August (+13% YtD) -- the largest monthly loss in three months -- despite a positive rebound in the past week. Developed Markets outpaced (+13% ytd) their EM peers (2% ytd) by a wide +300bps margin in relative USD terms (+50bps in local terms), as EM currency depreciated across the board against the USD with the RMB hitting an 11-year low of $7.15 and the BRL testing its 30-year low of $4. Note that the Argentinian Peso has also depreciated sharply (by 30% to $60) since the August 11 primary elections, where opposition leader Alberto Fernandez won, placing him as favorite for the October 27 Presidential Elections. Argentina's USD bonds have declined to record lows and CDSs have sky-rocketed after the Government announced reprofiling-debt plans and eventually imposed currency controls on Sunday.
Japanese equities underperformed (-4%) -- due to a less dovish Bank of Japan and a strong JPY (see graph on page 11) and the UK was down -5% due to political uncertainty as well as lower commodity prices, whereas US and Euro area indices finished lower by 2%. Oil reversed some of its losses by the end of August, albeit ending the month down by 8% (Brent @ $60/barrel) due to global demand concerns. Finally, gold prices rose sharply to their highest level since September 2013 (+18% YtD @ $1525 per ounce) supported by declining USD real rates, which turned negative for the first time since 2016.